Author: johnredwood

This week Portugal managed to borrow one year money at a negative interest rate. Yes, that’s right. The lender has to pay a small sum for the privilege of lending to Portugal. You have had to pay Germany for the privilege of lending to her more often in recent months and over longer term loans,  but for this to happen for Portugal as well is surely a matter to examine.

Portugal currently does not have a Prime Minister. The recent General election did not deliver a majority for any party. The outgoing PM and government was allowed to stay in office by the President, so the left wing parties who thought they had “won” the election voted it down. The President is thinking about what to do next. The outgoing government accepts austerity and the full Euro package of policies. The left wing opposition is anti austerity, though much of it is pro Euro. As we have seen in Greece that is a difficult combination of views to hold. Could the left wing parties come together to form a governing coalition? What would their approach then be to the policies required by the Eurozone?

Portugal is another piece of evidence in the case of the diminishing importance of national democratic choice in the Eurozone. When so many decisions about budgets, taxes, spending and borrowing are made for a country, much of the substance of normal elections is removed from decision by the electors.

Portugal has more than 11% unemployment, with more than 31% youth unemployment. It has only managed a growth rate of 0.4% a year since 1988, and suffered a nasty recession in recent years. Yet despite this, it can now borrow at  no cost.

As the US and UK attempt to distance themselves from Quantitative easing and in the case of the US contemplate an interest rate rise, monetary action and conditions remain anything but normal in the Eurozone. As the zone still finds growth hard to achieve and sustain, and as the scars of the crash and Eurozone crisis are still all too visible in unemployment and poor economic performance, the European monetary authorities experiment further with unorthodox interest rate and borrowing policies. Who would have thought the Germans would do that? Does risk lie ahead as debts are built up with no interest cost.? Why should people save and be prudent in such a world?

The long awaited speech from the Energy and Climate Change Secretary arrived yesterday.

It does represent a shift in thinking, to give greater prominence to security of supply and price compared to controlling carbon dioxide. The government still has the three aims of enough power, cheaper power, and less CO2. Past governments have found it impossible to deliver cheaper power, or even enough power, given the ways they and the EU have chosen to pursue lower CO2.

First the good news. The government now recognises that we do not have sufficient power available. There are risks if a day of no wind or  high wind coincides with low temperatures and power station failures. To overcome this the government is organising further “capacity auctions” to offer contracts to power suppliers to have more power available. These need to encourage more gas capacity. The speech does  not go into the detail of how this might work.

Then the other news. The government wishes to cut carbon by organising a large switch out of coal generation into gas generation. They need to be careful. Premature closure of all coal will leave us with too little power. They need to have the gas stations up and running before the coal can be phased out.They say they know that, but EU rules are speeding coal closures too soon.

The government has removed subsidies for future onshore wind farms, and cut the subsidies for solar. It still presides over a very controlled and subsidised market. One of the ironies of the present position is that the government will have to intervene and offer favourable terms to get new gas stations. In a free market gas stations would offer the cheapest power, but in a subsidised world where gas stations have to close when the wind blows they end up being subsidised as well. Meanwhile the government is still offering quite large subsidies for offshore wind which will not offer good value for money.

 

The EU is on a wild ride to political union. Far from representing the status quo, the Better Stay in Europe (BSE) campaign wishes to sentence us to endless rows and uncertainties as the rest of the EU goes about its task of ever closer union.

The rest of the EU is working towards significant Treaty change to increase EU powers after June 2017. Were we still to be in the EU that would trigger another referendum for the UK under our EU referendum Act, agreed by all three main UK political parties in Parliament.

 

The 5 Presidents Report mapping the future of the Euro and the EU is quite clear on these matters. It states that in the first phase of completing the Union, up to June 30 2017, they intend to “build on existing instruments and make the best possible use of existing treaties” to increase central power and convergence by member states. In Stage 2 commencing in June 2017 they propose “concrete measures of a more far reaching nature…. The convergence process would be made more binding”.

 

Stage 2 is ambitious. It will include integrating the European Stability Mechanism into the EU law framework. It entails setting up a Euro area Treasury accountable at the European level. It means “integrate into the framework of EU law the Treaty on Stability, co-ordination and governance, the relevant parts of the Euro Plus Pact, and the intergovernmental agreement on the Single Resolution Fund.” This is jargon for saying the Euro now drives the EU, and the Euro’s needs must come to have a central part in the EU’s structure.

 

In other words, they intend major Treaty change to include the Euro Treaty, Euro area budgets, guarantees and transfers that the UK has expressly opted out from and so far largely kept out of the Treaties applying to all 28 member states. The medium term plan is to use the EU and its legal structures for all Euro activity, and to handle much more of the member states tax revenues and budgetary matters at EU level.

 

How would the UK keep itself out of all the costs and difficulties of the Euro in such a case? Stay in needs to explain how they might recommend voting on those major Treaty changes, as currently they claim the UK can stay free of the Euro and the tax bills it brings with it. How can you belong to a football club but refuse to play or watch football? The EU is  going to be driven by the needs of the Euro.

Nicola Shaw has recently published her invitation to us all to send in our ideas on how Network Rail should be structured and financed in future.

I will be sending in evidence. My first three conclusions for her are

1. As a business with all UK sterling revenues it should not borrow in foreign currencies again
2. All the time it remains a nationalised business with a full Treasury guarantee it should be lent money by the government  at government rates, borrowed by the government in the gilt market in the normal way.
3. It should stop all derivative hedging and trading.

 

When I first argued that Network Rail should not trade in derivatives in July 2012 it followed their reports acknowledging substantial  losses  in the year to March 2011, and again  in the year to March 2012.

The year to March 2012 saw £409 million of losses  in derivatives that were not hedge accounted and a further £45m of such losses in the year to March 2013.

I wrote a letter to the members of Network Rail, the group responsible in those days for the corporate governance and strategy of the business on behalf of the taxpayers who pay the bills. I asked them to explain their derivative strategy and why they thought it was good thing to be doing. My own  view was it should  be stopped.

Network Rail continued with derivatives, and reported losses of £982 million on them in 2013-14.  Their response claimed that although some of their derivatives were accounted as trading, they saw  them as a hedge against foreign currency borrowings which for some unknown reason they had chosen in preference to borrowing in pounds, and as a hedge against rising interest rates during a long period of ultra low rates.

Now Network Rail is fully under the control of the Treasury and Department for Transport I am asking again that all open derivative positions be closed down, or matching positions the other way be taken out to stop all future losses on these dangerous instruments.  They have had to ask for more taxpayer cash to put up against some of these positions, so they do matter within the budgets of the state.

 

The government has just changed the Immigration rules again, to make clearer certain important elements to the rules.

Refugee status will be withdrawn if someone obtained that status by deception. It will be withdrawn if the protection is no longer needed. It will be withdrawn if the person commits a serious crime, or becomes a threat to our national security.

New rules highlight the fact that no national   arriving from the EU  can make an asylum claim. Under EU law all EU countries are deemed to be safe, so any claim for asylum should be inadmissible unless there are exceptional circumstances. In future the UK will normally regard any EU national claim as inadmissible. If they present a case that they are exceptional it will be considered but there will be no right of appeal against a decision.

These and other changes are to tighten controls under existing EU rules, and may be helpful at the margin. Clearly they cannot and do not deal with the bigger issue of freedom of movement.

The French President reacted strongly to the barbarous attacks on  Paris, saying that France is at war with ISIL. Responding to terrorist mass murder is never easy, and his  language may well have caught the mood of anger of the moment. We need, however, to consider carefully what is the best response to this and similar outrages. We can learn from history.

There are three main ways established states and governments can respond to terrorism on home territory.  Terrorists can be treated as the most brutal kind of criminals. Their conduct is against the criminal law code of all civilised countries, as well as against the morality of most people in advanced societies. It is best under this approach to find, arrest  and prosecute them. It may be essential to kill them if they are caught during an  attack and threatening to kill more people if not stopped by force. The aim is to respond under our rule of law. Terrorists and suspects also have the right to a fair trial if apprehended, but can be killed legally by our authorities if they are an immediate threat to the rest of us. We do not licence our authorities to go round killing suspected or potential terrorists here in the UK who are  not an immediate threat, but wish to put them on trial or to deport them.

The second approach is to see them as warriors fighting against our society. One of the problems with this approach is they do not usually qualify as war fighters under international law. They do not normally wear uniforms so they can be  easily identified, may not carry identification documents, and do not fight on behalf of a recognised state that has declared war on us first. As the West is busy denying that ISIL is an official state, the act of identifying them as soldiers in a war in France is to undermine the argument that ISIL is not a proper state. Allowing them the dignity of soldiers also implies that we should expect retaliation against our society. When German bombs fell on London people did not rail against the criminality or illegality of the action, as we did  the same to German cities. It was brutal war where you had to accept retaliation. It seems to me unwise to glorify these mass murderers as soldiers with the implied recognition of their so called  state. We should not allow any justification of this monstrous violence.

The third approach which has been adopted for some past terrorist movements – which I am not recommending for today’s  ISIL – is to see that they have a political agenda which has some justice if pursued in a non violent way, and to initiate political talks to see if a new peace can be created where the terrorist groups come to play a peaceful political role. Some thought of the ANC as a terrorist organisation, but the world came to see it as a legitimate expression of opposition to apartheid which could  become the elected government of South Africa. The IRA were brought into the peace process in Northern Ireland and turned to political action.

So how should the West respond to ISIL and related groups spreading their criminal deeds from the Middle East to the streets of Paris or London?  There are a number of things our governments must do.

The first is to redouble the efforts to secure good intelligence. There has to be deep and constant scrutiny of those most likely to be terrorists, where there is reason to  be suspicious.

The second is to have stronger  border controls than we currently have, to prevent the entry of those who might be a threat to our society, and to monitor or control the re entry of British citizens who have chosen to go on prolonged  visits to places where they have access to terrorist and extremist training.

The third is to make sure we have well armed rapid reaction forces close to likely targets and in our main cities capable of deploying very quickly should a terrorist attack begin.

The fourth is to evict on evidence more from our country who do not wish to live by our rule of law after coming here, and who may represent a threat to us.

The fifth is to ensure our education system in secondary schools and Colleges is free from extremist and hate based influences.

All this is a sensible programme of security for the UK,  based on the enforcement of our criminal law.

This leaves open the large question of what if anything   the UK and the rest of the West can do to help stabilise the situation in Syria? The UK has to accept that we should not and could not lead an invasion of Syria ourselves to defeat ISIL and other rebel and terrorist groups, in order to install some new administration. The US could do that, but under President Obama has no intention of doing so . The Western allies are agreed that any ground war fighting in Syria has to be done by Arab forces,  not by the US or UK armies. The US is providing some air intervention, but so too now is Russia. Until we have a clearer idea of the ground forces that can win and need our help I do not wish to see UK planes or drones doing this job. The lack of any invitation to do so from the official government of Syria is not just a legal  but also a practical complication in the way of bombing campaigns, making access to the ground to target bombs well and follow up to check results that much more difficult. The nature of the official Syrian government is a major obstacle in planning intervention in the Syrian civil war.

I welcome the opening of a peace process. Syria needs more political energy and fewer bombs.

 

 

We all send our sympathies to the people of Paris who faced a series of barbarous attacks last night. Our thoughts are with the families who have lost loved ones.

The western intelligence agencies do often intercept and prevent such atrocities. When an attack gets through it provides additional incentive to improve and augment the Intelligence effort. Such events lead governments to take action after the event which may be counter productive. Disrupting the lives of many and changing the normal pattern after all the attackers are dead or arrested gives the terrorists an extra win.

Free and open societies are vulnerable to such madness and badness. Each of the gunmen  was someone’s son, or brother or other friend or relative. The authorities need the vigilance and support of all of us, as they are only as good as the evidence and information they receive or collect. None of us want to live in a society of spies and informers, but we do need to think our neighbours and fellow citizens would report conduct that could be the prelude to mass murder.

The other thing we need from the authorities is a rapid and decisive response as soon as any armed incident is reported. Potential assassins need to know they are likely to be killed before they can kill many.

Living with the EU is like having a constant cyber attack on our law codes, rules and regulations. The system is never stable, with the EU constantly seeking to extend their grip, change their laws, and increase their jurisdiction. They do all this in the name of European integration. They often try to tell the UK that it is mainly needed for the integrity of the single market. This is simply untrue.

To have a successful trade you usually have a system where the customer specifies what he wants, and the supplier explains what he has on offer. If they coincide at a good price there will be a transaction. Sometimes the customer side influences what the producer makes, because of course the producers want to sell more and need to listen to what the customers want. Sometimes the producers influence what the customer wants, because the producer defines a need or offers a solution which the customer finds attractive.

If you want to have a common market between two or more countries you can do so by having the simple rule which has been applied to the EEC/EU. That states that if something is of merchandisable quality in country A, it can be offered for sale in country B, as all countries in the zone accept the standards in each other’s jurisdictions. It does not mean customers will also accept the quality or style of any given product across national borders, but makes it easier for producers to offer their goods and see what happens.

The EU has moved on from this idea to seek to legislate for a wide variety of common standards and specifications for goods and services. They have got a long way towards there being an EU recipe or approved way of designing and making many things. This cramps innovation, may bring EU producers out of line with demands elsewhere in the world, and requires a large national bureaucracy in each member state to enforce the common rules.

The argument over leaving is usually couched in narrow terms in relation to trade and the common market by its supporters. They are old fashioned and out of date in this respect. The EU has long since moved on from being a common or single market, to being much more. They say the UK would still have to conform with EU rules and requirements when selling to the EU from outside. It is of course true that the UK has to conform with US rules and specifications when selling to US customers. Where we would gain from being outside the EU is we would not longer have to apply all those same rules and regulations to our dominant domestic trade in the UK, nor to goods and services supplied to the rest of the world outside the EU.

The defenders of the EU still say we would lose influence over the EU rules and standards for that minority of our output which would be exported to the EU. Even that is only partially true. Some of the EU’s rules comes from global agreements, where the UK would gain a seat at the world table and therefore continue to influence by that means what the EU was going to do. It also misses the point that where the EU is legislating beyond global minima the UK currently has little ability to stop them where we disagree. The UK government has lost a string of court cases over financial and banking regulation in recent months illustrating our inability to steer even in an area where we have the largest economic presence in the EU.